Complexity Economics: An Introduction

Complexity Economics pp. 8-25
DOI:

Complexity Economics: An Introduction 

Authors: W. Brian Arthur, Eric D. Beinhocker & Allison Stanger  

 

Excerpt

In September 1987, the then-nascent Santa Fe Institute (SFI) held a conference to look at the economy as an evolving complex system. It was organized by physicists Philip Anderson and David Pines and economist Kenneth Arrow. Out of that conference a year later came the Santa Fe Institute’s first research program: The Economy as an Evolving Complex System. One of us (Arthur) headed that program, and another (Beinhocker) joined it in 1994, and from that program in turn came a different approach to economics—what many refer to as “complexity economics.” SFI has been associated with complexity economics ever since, and the approach has continued to develop and influence not just economics, but social science more broadly. In 2014 SFI devoted its annual symposium to complexity economics, and it did so again in 2019. The collection of talks in this volume provides a snapshot of recent thinking and examples of how the initial ideas have developed over the decades.

The Emergence of Complexity Economics

Complexity economics views the economy as a system not necessarily in equilibrium, but rather as one where agents constantly change their actions and strategies in response to the outcomes they mutually create. It holds that computation as well as mathematics is useful in economics, that increasing as well as diminishing returns may be present in an economic situation, and that the economy is not something given and existing, but forms from a constantly developing set of actions, arrangements, and technological innovations. The economy is thus comprised of evolving networks of interacting agents, institutions, and technologies—networks of networks. The macro- level patterns of the economy—growth, innovation, business cycles, market booms and busts, inequality, and carbon emissions—then emerge from these dynamic micro- and meso-level interactions. From the complexity economics perspective, change is largely an endogenous phenomenon, not simply the result of unexplained shocks from outside the system.

The complexity viewpoint has modern roots in pioneering work in the physical sciences conducted decades ago by groups in Brussels, Stuttgart, Ann Arbor, Los Alamos, and elsewhere. But the ideas have even earlier precedents in economics. Adam Smith had a deep, intuitive understanding of emergence and was arguably the first complexity economist. Smith and other early economists were aware that aggregate patterns emerge from individual behavior and interactions, and that individual behavior responds to these aggregate patterns. Smith’s famous metaphor of the “invisible hand” of markets is popularly misinterpreted as a message that “greed is good” (something Smith did not believe), but in reality was a statement about emergence—how individual actions “without intending it, without knowing it” lead to collective outcomes which feedback to influence further actions. There is thus a recursive, reflexive loop at the heart of the economy. Complexity economics asks how this loop drives the behavior of the system over time, i.e., how will the pattern of the system today shape individual decisions which will then collectively create the pattern of the system tomorrow.

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